The government and the Reserve Bank of India may work together to
formalise the target of keeping inflation at
below 6%, with Finance Minister Arun Jaitley announcing in his budget speech on
Saturday that the Centre has just concluded a formal agreement with the central
bank to this effect.

"To ensure
that our victory over inflation is institutionalised and hence continues, we
have concluded a Monetary Policy Framework Agreement with the RBI, as I had
promised in my budget speech for 2014-15," the minister said, referring to
the framework which clearly states the objective of containing inflation within
the 6% mark. Jaitley added, "We will move to amend the RBI Act this year, to
provide for a Monetary Policy Committee."

Allaying
apprehensions that there could be some opposition to the proposal from the
central bank as some feel that it could lead to some dilution of its autonomy,
Jaitley said: "The Monetary Policy Framework Agreement has been signed by
the Governor of RBI so I don't see how they will be opposed to it."

The decision to
develop a monetary policy framework follows from the recommendation by the
Urjit Patel committee, which had suggested that RBI target to bring down retail
inflation to 8% by January 2015 and 6% by January 2016.

"The proposal
for a monetary policy committee is a key aspect of the new framework. In line
with international best practices, it is likely to provide greater transparency
on the decision-making process," said Saugata Bhattacharya, chief India
economist at Axis Bank. "External experts, from government and outside,
will have a voting rather than an advisory role. The broader dispersion of
voting also incorporates a diversity of viewpoints, making the decision outcome
more robust," he added. The government had made its stance amply clear in
its survey of the economy released on Friday.

"The
government and the RBI need to conclude the monetary policy framework agreement
to consolidate the recent gains in inflation control and codify into an
institutional arrangement what has become the de facto practice," the
survey said. It added that this arrangement "would signal that both
government and RBI jointly share the objectives of low and stable
inflation". Under the new framework, the interest rate or key policy rate
will be decided by a monetary policy committee comprising representatives from
both the government and RBI. In countries such as Canada, which has adopted
inflation targeting as its monetary policy objective, the government mandates
an inflation target to the central bank.

Ever since the RBI
put the Report of the Expert Committee to Revise and Strengthen the Monetary
Policy Framework or what is popularly known as the Urjit Patel committee report
in public domain, it virtually stopped following the multiple indicator
approach of looking at parameters like credit, deposit and money supply among
others. It started looking at CPI as a formal monetary policy objective.
Jaitley had in his previous budget said it is essential to have a modern
monetary policy framework to meet the challenge of an increasingly complex
economy.

Budget 2015: Interest rate will be decided by a panel comprising representatives from government and RBI
Reviewed by sambasivan srinivasan
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